Integración Financiera Internacional y Crisis Financieras Internacionales

Integración Financiera Internacional y Crisis

Financieras Internacionales

3 de noviembre de 2009

Emilio Ontiveros

2Escuela de Finanzas Aplicadas, 2009. Todos los derechos reservados.

Integración Financiera Internacional y Crisis Financieras Internacionales. Emilio Ontiveros

Contents

1. The New International Financial Landscape

2. Measures and Drivers of the IFI

3. Effects: opportunities and risks

4. New Risks

5. Looking to the future. Requirements



1. The New International Financial Landscape

a)Financial Deepening+

b) International mobility of financial assets and liabilities=

INTERNATIONAL FINANCIAL INTEGRATION (IFI):Financial Globalization



1. The Changing Financial Landscape. Financial Deepening



1. The Changing Financial Landscape. International Capital Mobility

Source: Obstfeld and Taylor ( 2002)



2. Measures of IFI

• De jure measures: restrictions on capital account

a) IMFb) Mody and Murshid (2002).

• De facto measures:

a) Stock of Assets and Liabilities: Lane and Milesi-Ferretti (2001). Edison and Warnock ( 2001) , Chanda (2000 ), O’ Donnell ( 2001)

b) Saving-investment correlations and various interest parity conditions (Frankel, 1992)

c) Discount rate: Robert P. Flood and Andrew K. Rose ( 2004)



2. Measures of IFI. The Net External Position

• 5 categories of external liabilities:• Foreign Direct Investment• Portfolio equity investment• Portfolio debt investment• Other investment: bank loans, trade credits, and

currency deposits,…• Financial Derivatives

• 6 categories of assets:• the same 5 as liabilities + official reserves



1. The Changing Financial Landscape. IFI Trends 1970–2003 (Percent of GDP)



1. The Changing Financial Landscape. IFI Trends. Real Interest Rate Convergence

Long-Term Real Interest Differentials : ˜rt = rt − rUS



2. Drivers of IFI

Liberalization and deregulation: • Opening the capital account• Removing “financial repression” policies • Removing restriction to foreign ownership

Financial Privatization• Privatization of Institutions• Instruments: private debt + equity

Financial InnovationTechnological InnovationReal Globalization

More Markets, Less Intermediation



2. Drivers of IFI : Liberalization/Deregulation



2. Drivers of IFI: Financial Liberalization by Income Group, 1973-96

Source: ABIAD AND MODY( 2005)



2. Drivers of IFI : Financial Innovation

Informational Efficiency New Instruments

New Agents

New Technologies

Rise of modern risk management



2. Drivers of IFI : Financial Innovation. Instruments



2. Drivers of IFI : Financial Innovation. Agents

US Equity Mutual Funds: Net New Cash Flows (In billions of U.S. dollars)



2. Drivers of IFI : IT

1 cost of a three-minute phone call from NY to London



3. Effects

Opportunities: “ AN ENGINE OF GROWTH”

Incentives to diversification: decline of the home bias.

Risks: ” A SOURCE OF INSTABILITY”

Financial crises



3. Effects on developing economies. The Theory

Financial integration potentially allows:

1) Risk sharing.

2) To ease the capital scarcity constraint a developing economy might face.

3) To bring foreign direct investments (FDI) into the country.

“The good cholesterol” : To boost productivity

4) The main potential benefit of financial globalization for developing countries is the development of their financial system: more complete, deeper

and more stable financial markets.

Literature on benefits of financial integration for LDCs: McKinnon (1973), Shaw (1973), King and Levine (1993), Levine (1997), Fry (1997), Beck, Levine, and Loayza (2000), Epaulard and Aude Pommeret, 2005.



3. Effects on developing economies. The evidence

There is mixed empirical evidence on whether capital account liberalization and financial integration have resulted in increased long-run economic growth in developing economies.

Survey: Edison, Klein, Ricci, and Sløk, (2002a )

Over the last quarter of a century financial instability has

reduced the incomes of developing countries by roughly 25 per cent.

Survey: Dobson and Hufbauer’s (2001)



3. Financial crises

“too many, too often,…”

• 1982: Debt Latin America

• 1987: Stock market crashes

• 1989 : Failures of US S+Ls

• 1990: Junk bond And US municipal bond meltdowns

• 1992: EMS crises

• 1994: Mexico. (“Tequilazo”)

• 1997: East Asia ( “ Asian flu”)

• 1998: Russian debt default ( “ The Russian worm”)

• 1998 : LTCM ands its imitators

• 1999: Ecuador default

• 2001- 02 : Argentina devaluation + default



3. Financial Crises. What in common?

a) All (near) in LDCs countries

b) Causes c) Contagion: countries, markets and institutions.

d) Heavy Costs



3. Financial Crises. What in common? Causes of financial instability

a) Unsustainable macroeconomic policies Krugman (1979), Obstfeld and Taylor (1998 ): The Trilemma

b) Fragile financial systems Goldstein and Turner (2003)

c) Institutional weaknesses. IMF, GFSR., Williamson and Mahar (1998); Demirgüç-Kunt and

Detragiache (1998)

d) Flaws in the structure of international financial markets Eichengreen and Hausmann (1999), Devenow and Welch (1996) ,

Bhagwati (1998), Eichengreen, Hausmann, and Panizza (2002): “The original sin”



Contagion



3. Financial Crises. What in common? Contagion

Channels :a) Investor behavior:

* Herding and fads: Bikhchandani, Hirshleifer, and Welch (1992), Banerjee (1992), Banerjee (1992)

* Global diversification of financial portfolios in the presence of information asymmetries: Calvo and Mendoza (1998),

b) Economic linkages

• Trade: Eichengreen, Rose, and Wyplosz (1996) , Glick and Rose (1999), Kaminsky and Reinhart (2000)

• Finance: Kaminsky and Reinhart (2000), Mody and Taylor (2002), Frankel and Schmukler (1998) , Caramazza, Ricci, and Salgado (1999)



Emerging Market Bond Yield Spreads, 1992-2002



3. Financial crises. Costs



Korean Social Indicators Following the Crisis

3. Financial crises. Costs



3. Post-Crises. Capital Flows to Emerging Markets



Source: Graciela L. Kaminsky, Carmen M. Reinhart and Carlos A. Végh ( 2003)

Net Private Capital Flows



3. Solutions to the instability in Emerging countries

1. Re-regulate domestic financial markets Goldstein and Turner (2003) Bhagwati (1998), Stiglitz (2002).

2. Reimpose capital controls Dobson and Hufbauer (2001), Brouwer (2001).

3. Adopt a common currency Mundell ( 2000)

4. Pursue an international solution to the currency-mismatch problem

Eichengreen and Hausmann (2003)



4. New Risks

Macro: Global Imbalances

Micro: Concentration in Derivatives Markets. Credit Derivatives Growing role of Hedge Funds in Derivative Markets and the

Financial System Conglomeration and cross-sector competition



4. New Risks: Global Imbalances(In billions of U.S. dollars)



4. New Risks: Global Imbalances. (% world GDP)



4. New Risks: Global Imbalances. Current account balance, US, m.m$US



4. New Risks: Global Imbalances. Foreign holdings of US Treasuries



4. New Risks: Global Imbalances Net lending and borrowing in the US economy



4. New Risks: Global Imbalances. US household debt-to-disposable income ratio



4. New Risks: Global ImbalancesSelected financial vulnerability indicators for the main emerging market economies



4. New Risks: Global Imbalances. Emerging market sovereign bonds spreads



4. New Risks: Global Imbalances.Underlying credit quality of benchmark EMBIG bond index



US Current Account



US International Investment Position



4. Hedge Funds



4. Hedge Funds. An estimate of hedge funds’ share of total trading volumes



4. New Risks. Hedge Funds. Correlation among H.F. strategies



4. Conglomeration and cross border



4. From Volatility to Instability

Lack of Robust Risk Management: Excessive leverage Dynamic hedging strategies Rigid risk limits : value-at-risk models and ratings-based approach in Basel

II. Risk of pro-cyclicality

Incentive structures: Peer-group performance measures Index-tracking

Lack of transparency

Market Infrastructure Weaknesses

IMF, GFSR, Sept 2003, chap. III



5. Looking to the future. Requirements

National exigencies: Credit risk management: solvency, market and liquidity risk Infrastructure ( payments systems included) Supervision: traditional or integrated

Global exigencies: Don't press the LDCs A Cooperative Strategy toward a International Financial

Architecture: Internationalization of regulation and supervision

Integración Financiera Internacional y Crisis Financieras Internacionales

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